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September 19, 2007

In what the court described as "one of those non-patent patent cases," the Seventh Circuit yesterday affirmed a grant of summary judgment to a patentee who, in its license agreement, included a noncompete provision. The licensee had terminated the license, and argued the noncompete constituted patent misuse, and was therefore void.

The court rejected this argument. Applying rule of reason analysis, the court found that the noncompete provision was reasonable, as there was no evidence that the patentee had market power or that there were anticompetitive effects. The noncompete was only for 18 months, was limited to the geographic scope of the original license (a portion of Wisconsin), and permitted the sale of two competing products. Accordingly, the court held there were no anticompetitive effects, and therefore there was no patent misuse. Similar claims that the provision violated state law were also rejected. As a result, the court affirmed the district court's grant of summary judgment.

Allan Block holds patents relating to the manufacture of concrete blocks. It does not make the blocks itself, instead licensing various manufacturers to produce and sell the blocks in various areas of the country.

Allan Block entered into one such license with County Materials, which granted County Materials an exclusive license to Allan Block's patented blocks in northwestern Wisconsin. The license agreement included a noncompete provision preventing County Materials from directly competing with Allan Block's products for a period of 18 months after termination of the agreement. However, the provision was limited to the geographic scope of the exclusive license, and permitted County Materials to sell two specific types of competing blocks.

Eventually, County Materials terminated the license. As is often the case, it decided it was not content to only sell the two permitted blocks for the 18 month noncompete period. It informed Allen Block of this, basing its position that the noncompete constituted patent misuse. Allen Block replied that it would sue to enforce the noncompete provision. County Materials then filed for a declaratory judgment that the noncompete provision was void. The district court granted summary judgment to Allen Block, and County Materials appealed.

The Seventh Circuit affirmed. As an initial matter, the court noted that while ordinarily appeals dealing with patent law are heard by the Federal Circuit (pursuant to 28 U.S.C. § 1295), in this case, it was the proper court. This was because while patent misuse was being raised by the declaratory judgment plaintiff, the origin of the district court's jurisdiction was diversity of citizenship (§ 1332), rather than a claim based on a patent (§ 1338). Further, in declaratory judgment cases, the basis for federal jurisdiction is "the presumed suit by the declaratory judgment defendant." Here, that would be breach of contract, not patent infringement. Accordingly, the Seventh Circuit properly had jurisdiction over the appeal.

Turning to the merits, the court noted that the scope of patent misuse has been narrowed substantially over the past few decades. 35 U.S.C. § 271(d) specifically exempts certain behaviors from being considered patent misuse. Further, case law has noted only a few behaviors that are per se patent misuse, such as "arrangements in which a patentee effectively extends the term of its patent by requiring post-expiration royalties."

Here, the alleged misuse fell in between: it was neither proscribed as per se patent misuse, nor was it exempted by statute. In such cases, courts apply a rule of reason analysis, similar to that applied in antitrust law. Under this analysis:

a court must determine if that practice is reasonably within the patent grant, i.e., that it relates to subject matter within the scope of the patent claims. If so, the practice does not have the effect of broadening the scope of the patent claims and thus cannot constitute patent misuse. If, on the other hand, the practice has the effect of extending the patentee's statutory rights and does so with an anti-competitive effect, that practice must then be analyzed in accordance with the rule of reason. Under the rule of reason, the finder of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors, including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint’s history, nature, and effect.

County Materials essentially argued that Allan Block improperly used its patent as leverage to obtain the noncompete provision. The court flatly rejected this, noting that, under Illinois Tool Works, a patent holder is not presumed to have market power, and there was no evidence of market power in this case. Further, there was no evidence that Allan Block had "impermissibly broadened the 'physical or temporal scope' of the patent grant with anticompetitive effect." While County Materials may have been adversely affected by the noncompete provision, there was no evidence that it was anticompetitive. As stated by the court:

there does not appear to be any evidence in the record showing that these limited requirements have hurt competition for cement blocks in County Materials's former exclusive territory. In the related field of antitrust, the Supreme Court has said that "[i]t is axiomatic that the antitrust laws were passed for the protection of competition, not competitors."

Accordingly, the holding of no patent misuse was affirmed. The court similarly disposed of County Materials's claims that the noncompete provision violated Minnesota law (the relevant law under the contract). Under Minnesota law, noncompete agreements are valid if they "(1) protect a legitimate interest of the party in whose favor it is imposed, (2) [are] be reasonable as between the parties, and (3) [are] not . . . injurious to the public." Here, for many of the same reasons, the court found these requirements satisfied, and the provision passed muster under Minnesota law as well. Accordingly, the district court's grant of summary judgment was affirmed.

To read the full decision in County Materials Corp. v. Allan Block Corp., click here.

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